More Money, More Expenses: How To Deal With Lifestyle Inflation

Lifestyle inflation is a phrase used to describe an individual's increase in expenditure as their income increases such that what was formerly considered a luxury becomes a necessity. 

Here’s an example - a fresh graduate gets a new job and lives in a one-roomed bedsitter in a Eastlands estate in Nairobi for Ksh10,000 rent. 

After six months, the graduate is promoted, gets a salary bump, and chooses to into a one-bedroom apartment at what’s considered an exclusive neighbourhood. 

This added expense in rent  (because the graduate wants to and is not out of need) is referred to as lifestyle inflation. 

Does any of this sound familiar? We’ll let’s get into exploring more about lifestyle inflation.

Why Does Lifestyle Inflation Happen

Lifestyle inflation is a guaranteed consequence of acting on comparison mentality; which means, keeping up with the Joneses’ attitude and making decisions to spend more based on your increased income and comparisons to others financial and/or social status. 

Situations that trigger lifestyle inflation emphasise the acquisition of objects because you want to. Examples of such instances are getting a job promotion, appreciable success in business or even inheritance – where you earn more and spend more to achieve some desired degree of pleasure. 

When Lifestyle Inflation Makes Sense

Justifiably, there are positives to spending money because you can, without falling behind on your financial obligations due to overspending or impulse spending or borrowing. For that reason, the key is to celebrate modestly by making gradual changes.

Here are some scenarios when lifestyle inflation makes sense:- 

1. You’ve heard the phrase dress the part because in reality, perceptions matter in every area of life. For instance, upgrading your wardrobe after a promotion or job raise to match expected professional and personal impressions. 
   

2. Spend a little extra to improve your quality of life, such as changes to promote work-life balance. For example, moving to an apartment of the same rent amount or slightly higher at a location closer to work or a more secure location.
   

3. Purchase a financial product/products (like life insurance, pension or retirement fund, shares, general insurance, bonds and others) as a financial safety net through long-term and short-term gains. 
   

Strategies To Avoid/Control Lifestyle Inflation

Financial security must always be a priority. That means, setting clear financial goals that prioritise saving and investment over spending, creating a practical budget/financial plan and sticking to it.

Below are some strategies to avoid unnecessary lifestyle inflation consequences. 

1. Choose To Save First 

Anytime you gain extra money, it’s a good time to inject more fuel into your financial goals. The wisest thing to do is increase the amount of money you save typically by the same percentage that your income has grown by or even more. 

Only after automating the deduction of this new savings amount (See 50/30/20 budget rule) should you then proceed to see what improvements you can make to your lifestyle to celebrate your achievement. 

Or you could choose to maintain your current lifestyle as is and channel this entire additional income into an investment fund and power yourself up the 7 stages of financial freedom. 

2. Separate Your Needs and Wants

While some purchases are necessary, it’s key to separate needs from wants. Here’s how, make realistic, honest assessments about whether a potential purchase is a need or a want, based on your real-time financial situation. 

This way, you learn to make better financial decision-making and avoid lifestyle inflation. 

3. Start Budgeting. Keep Budgeting

Budgeting is about purposely classifying and allocating your money for specific functions at set amounts and timelines. 

If you have one, stick to it. If you don’t have one, start on one.

Having more money may seem like a bulletproof plan to getting ahead of money problems - but without a budget, it would not be a surprise to find yourself in even deeper waters. 

4. Treat Yourself (Within Reason)

Enjoy what you earn. Avoid going overboard by using your budget to help track your spending.

Now and then, you can treat yourself - a budget makes it more enjoyable when you don’t have to stress about money. 

5. Understand Whom You’re Hanging Out With

Ask yourself, do you socialise with people who pressure you or make you feel like you need to spend to fit in? If yes, it's time to make some changes - friendships are not a subscription.

If the challenge is that you’re in over your head and you're at fault, be honest with your social circle. Consider having a frank conversation and graciously receive their support to get you back on track. 

Here are some budget hangout ideas you can select from to ensure everyone has a good time. 

6. Pay Off Your Debts & Don’t Take On More Unplanned Debt

Your earning potential is unpredictable; whether you're employed or have a lucrative business today, there’s no guarantee about the future.

Don’t assume that your extra income is financial security for you to go ahead and borrow more or lend indiscriminately. 

Choose to improve your credit score by paying off your debts and budgeting for donations or monetary gifts and money you plan to lend.

If you’re not clear on how to create a workable debt repayment plan, seek expert financial assistance. 

Bottom Line: Enjoy Your Wealth & Build Your Wealth

Luxury is not a problem. Desiring luxury is not a problem – not planning for luxury is. 

The pursuit of luxury without a practical plan and self-discipline leads to derailed financial goals and short-lived gratification, which can entrap anyone. 

If you are on the verge of lifestyle inflation, it’s never too late to get started on monitoring your earnings and spending. 

Take advantage of budgeting resources to build a practical and custom budget that suits your financial situation because; a goal without a plan is just a wish.